OBR credibility on line after four downgrades

The credibility of the independent Office for Budget Responsibility (OBR)
would be threatened if the Government's fiscal watchdog has to revise its
forecast significantly again next year, economists have warned.

Giving evidence to the Treasury Select Committee (TSC), Roger Bootle, managing director of Capital Economics, suggested the Chancellor may have to disband the OBR next year if its forecasts are so severe that George Osborne would have to inflict further austerity on the country to meet his deficit reduction targets.

The Chancellor established the OBR to much fanfare in May last year – in one of his first acts just days after the Coalition Government was formed. Since its creation, it has revised its forecasts down four times – most recently alongside the Autumn Statement last week.

The scale of its downgrade to the long-term productive potential of the economy – the "output gap" – meant that the Chancellor would have missed his cast-iron fiscal mandate, forcing him to announce a further two years of austerity measures to cut another £23bn of public spending.

Mr Bootle told MPs: "If they revise the output gap lower again with result that yet more of deficit is thought to be structural rather than cyclical then the Chancellor is going to be in a very difficult position indeed.

I would imagine by that stage that the OBR's forecasting credibility will have been damaged, and it will be open the Chancellor to decide whether he wants to continue down this route or not.

"Certainly, I think that it could be quite damaging to then say that on the back of these forecasts we've got to tighten policy yet again. Not just damaging but really rather incredible."

He added that it may have been an error to tie the country's consolidation programme to the vague notion of the output gap, raising questions about "the various techniques used by the OBR and, on the back of that, calibrating the whole of fiscal policy".

Jonathan Portes, director of the National Institute of Economic & Social Research (NIESR), noted that "the OBR's view of potential output is now somewhat more pessimistic than NIESR's". He added that the Chancellor has set the wrong fiscal mandate, as promising to eliminate the structural deficit over a rolling five-year horizon "does not ensure long-run sustainability".

Robert Chote, chairman of the OBR, appears before the TSC on Tuesday.

Mr Portes also claimed that the Government could afford a two-year temporary £30bn stimulus programme as it would not qualify as structural spending, so fall within his mandate.